Pricing Considerations Pricing Considerations and Approachesand Approaches
10 - 2
Definition
• Price The amount of money charged
for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 3
Price Has Many Names
What is Price?
• Rent• Fee• Rate• Commission• Assessment
• Tuition
• Fare
• Toll
• Premium
• Retainer
• BribeBribe• SalarySalary• WageWage• InterestInterest• TaxTax
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 4
What is Price?
• Dynamic Pricing on the Web allows SELLERS to: Monitor customer behavior and tailor
offers. Change prices on the fly to adjust for
changes in demand or costs. Aid consumers with price
comparisons. Negotiate prices in online auctions
and exchanges.
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 5
What is Price?
• Price and the Marketing Mix: Only element to produce revenues Most flexible element Can be changed quickly
• Common Pricing Mistakes Reducing prices too quickly to get
sales Pricing based on costs, not customer
value
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 6
Factors to Consider When Setting Price
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Market positioning influences pricing strategy
• Other pricing objectives: Survival Current profit
maximization Market share
leadership Product quality
leadership
Internal Factors
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 7
Factors to Consider When Setting Price
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Pricing must be carefully coordinated with the other marketing mix elements
• Target costing is often used to support product positioning strategies based on price
• Nonprice positioning can also be used
Internal Factors
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 8
Factors to Consider When Setting Price
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Types of costs: Variable Fixed Total costs
• How costs vary at different production levels will influence price setting
• Experience (learning) curve affects price
Internal Factors
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 9
Factors to Consider When Setting Price
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Who sets the price? Small companies:
CEO or top management
Large companies: Divisional or product line managers
• Price negotiation is common in industrial settings where pricing departments may be created
Internal Factors
Goal 1: Identify and define internal factors affecting pricing decisions
10 - 10
Factors to Consider When Setting Price
• Nature of market and demand
• Competitors’ costs, prices, and offers
• Other environmental elements
• Types of markets Pure competition Monopolistic
competition Oligopolistic
competition Pure monopoly
• Consumer perceptions of price and value
• Price-demand relationship Demand curve Price elasticity of
demand
External Factors
Goal 2: Identify and define external factors affecting pricing decisions
10 - 11
The Market and Demand Factors that
Affect Pricing Decisions
The Market and Demand Factors that
Affect Pricing Decisions Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Affect on the Price.
Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Affect on the Price.
Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers Trading
Over a Range of Prices.
Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers Trading
Over a Range of Prices.
Oligopolistic CompetitionFew Sellers Each Sensitive to Other’s
Pricing/ Marketing Strategies
Oligopolistic CompetitionFew Sellers Each Sensitive to Other’s
Pricing/ Marketing Strategies
Pure MonopolySingle Seller
Pure MonopolySingle Seller
Different Types of MarketsDifferent Types of Markets
10 - 12
Demand CurvesDemand CurvesP
rice
Quantity Demanded per Period
A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.
P2
P1
Q1Q2
Pri
ce
Quantity Demanded per Period
P’2
P’1
Q1Q2
B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.
10 - 13
Factors to Consider When Setting Price
• Nature of market and demand
• Competitors’ costs, prices, and offers
• Other environmental elements
• Consider competitors’ costs, prices, and possible reactions
• Pricing strategy influences the nature of competition Low-price low-margin
strategies inhibit competition
High-price high-margin strategies attract competition
• Benchmarking costs against the competition is recommended
External Factors
Goal 2: Identify and define external factors affecting pricing decisions
10 - 14
Factors to Consider When Setting Price
• Nature of market and demand
• Competitors’ costs, prices, and offers
• Other environmental elements
• Economic conditions Affect production costs Affect buyer
perceptions of price and value
• Reseller reactions to prices must be considered
• Government may restrict or limit pricing options
• Social considerations may be taken into account
External Factors
Goal 2: Identify and define external factors affecting pricing decisions
10 - 15
General Pricing Approaches
• Cost-Based Pricing: Cost-Plus Pricing Adding a standard markup to cost Ignores demand and competition Popular pricing technique because:
• It simplifies the pricing process• Price competition may be minimized• It is perceived as more fair to both
buyers and sellers
Goal 3: Contrast the three general approaches to setting prices
10 - 16
Cost-Based Pricing Example
- Variable costs: $20 - Fixed costs: $ 500,000
- Expected sales: 100,000 units - Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price$25 / (1 - .20) = $31.25
General Pricing Approaches
Goal 3: Contrast the three general approaches to setting prices
10 - 17
General Pricing Approaches
• Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing Break-even charts show total cost and
total revenues at different levels of unit volume.
The intersection of the total revenue and total cost curves is the break-even point.
Companies wishing to make a profit must exceed the break-even unit volume.
Goal 3: Contrast the three general approaches to setting prices
10 - 18
General Pricing Approaches
• Value-Based Pricing: Uses buyers’ perceptions of value rather
than seller’s costs to set price. Measuring perceived value can be
difficult. Consumer attitudes toward price and
quality have shifted during the last decade.
Value pricing at the retail level• Everyday low pricing (EDLP) vs. high-low
pricing
Goal 3: Contrast the three general approaches to setting prices
10 - 19
General Pricing Approaches
• Competition-Based Pricing: Also called going-rate pricing May price at the same level,
above, or below the competition Bidding for jobs is another
variation of competition-based pricing• Sealed bid pricing
Goal 3: Contrast the three general approaches to setting prices